MW Why 'drill, baby, drill' isn't lowering gas prices - and 6 ETFs to trade the Iran conflict
By Paul Brandus
Why should oil and gas companies drill? Prices have been - and still are - too low for them to bother.
Oil prices are down, but gas prices are not.
Global markets have had more than a week now to digest the Iran conflict. Traders have been whipsawed by wild swings, particularly in oil (CL00), which surged to $119 over the weekend from $67 at the start of the hostilities and dropped back to around $78 by Tuesday.
Why the dramatic reversal? Perhaps this comment President Donald Trump made on Monday had an impact: "The war is very complete, pretty much," he said.
But some traders may have missed a contradictory message when the president endorsed the comments of Defense Secretary Pete Hegseth, who said that the battle is just beginning.
So which is it? Pretty much complete or just beginning?
It's this lack of clarity that perhaps explains why bond markets remain cautious. Oil's wild ride has sparked new inflation fears, snuffing out a weeks-long Treasury bond rally and pushing yields on the key 10-year note BX:TMUBMUSD10Y back over 4%. The prospect of more inflation isn't what the U.S. Federal Reserve wants - nor is it welcome for stock investors.
Whatever happened to 'drill, baby, drill'?
"Regime changes in oil-producing countries - whether through leadership transitions, coups, revolutions or major political shifts - can have a profound impact on oil policy, production and global oil prices, in both the short and long term," Natasha Kaneva, head of global commodities strategy at J.P. Morgan, said in a research note.
Oil's sharp rise sure sounds like a "profound impact." But much depends on two questions: How much higher will prices go, and how long will they remain elevated? Even at almost $78 for West Texas Intermediate crude (CL.1), that represents about a 15% jump from just 10 days ago.
"While the military attacks are themselves supportive for oil prices, the key factor here is the closing of the Strait of Hormuz" and the risk of a "prolonged outage" of this key passageway, Ajay Parmar, director of energy and refining at ICIS, told Reuters.
U.S. consumers are getting hit. AAA says gasoline prices are up 55 cents since the conflict began, reaching a national average Tuesday of $3.54 a gallon - although crude's sharp pullback could bring some relief at the pump. Could Trump lower prices further by opening the Strategic Petroleum Reserve? He could, but you'll recall he criticized President Joe Biden for doing the same thing after Russia invaded Ukraine four years ago.
Meanwhile, whatever happened to "drill, baby, drill?" U.S. oil and gas companies have thus far declined to do that. The closely watched Baker Hughes rig count shows drilling is down sharply since Trump took office 14 months ago. Why should oil and gas companies drill? Prices have been - and still are - too low for them to bother. The higher prices go now, the more incentive there is to drill - but only if producers expect that prices will remain elevated.
Read: This might be the best way to invest in oil stocks right now
For the defense sector, supply meets drone
There was a White House meeting Friday between Trump and the CEOs of America's seven biggest defense contractors. The issue: Do the U.S. and Israel have enough weaponry for a prolonged fight with Iran - while maintaining sufficient reserves and production capacity - should conflict erupt elsewhere? For instance, what if China makes a move on Taiwan while the U.S. is distracted in the Middle East?
Trump wants a rapid increase in the production of precision-guided weapons and, on the defensive side, air-defense systems such as the Patriot missile. The money is there. Last year's so-called Big Beautiful Bill signed by the president included an extra $150 billion for defense.
And what about the new face of modern warfare - drones? Ukraine has shown the way here, and investors should take note that America is playing catch-up. Last month the Pentagon invited 25 U.S. drone makers to demonstrate their goods. This week it could place its first order of 30,000 one-way attack drones, part of what U.S. officials call the Drone Dominance program.
Investors can expect drone spending to ramp up, and not just for security applications. An updated analysis by Grand View Research projects the global market, now about $84 billion, will more than double by 2033. There are many U.S. startups, and a shakeout is likely coming. Exchange-traded funds here include the REX Drone ETF DRNZ, which focuses on pure-play drone manufacturers, and the broader Defiance Drone and Modern Warfare ETF JEDI. Component suppliers - batteries, imaging sensors and carbon fiber (for propellers), among other items in the supply chain, are also worth a deeper look.
Some drone companies have been absorbed by giant defense contractors including Lockheed Martin (LMT) and RTX $(RTX)$. Both of these companies have wide economic moats and throw off lots of cash. But current price-to-earnings ratios and other metrics suggest Lockheed Martin is a more reasonably valued stock currently. Several ETFs in the defense sector are solid bets if increased military spending continues, including iShares U.S. Aerospace & Defense ITA, SPDR S&P Aerospace & Defense XAR and Invesco Aerospace & Defense PPA.
No discussion about investment opportunities in the security sector would be complete with mentioning rare-earth minerals. Here, take a look at the VanEck Rare Earth & Strategic Metals ETF REMX. The U.S. is racing to reduce its dangerous dependance on China for these materials, which are critical for the production of F-35 stealth fighter jets, missiles, drones and more.
Also read: Beware the risk of a scorched-earth strategy from Iran, say Bank of America strategists
Plus: Soaring gas prices slow down a bit - but 'we are not out of the woods' yet
-Paul Brandus
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March 10, 2026 13:58 ET (17:58 GMT)
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